Microchip subsidy sleight-of-hand

Microchip lobbyists have been doing their best P.T. Barnum impressions for months, pushing for billions of dollars in subsidies without which the future of American microchip manufacturing is, apparently, doomed. But as Barnum reputedly said, “There’s a sucker born every minute.” While domestic chip manufacturing may merit a little congressional attention, what we’re seeing is a rhetorical sleight-of-hand that has exacerbated a larger problem in our state capitals.

The latest incarnation of the CHIPS Act just made it through Congress before the August recess. The legislation authorizes $54 billion for computer chip subsidies, with $39 billion earmarked for commercial microchip manufacturing. The rationalizations run the gamut from national defense fearmongering to vague threats of supply chain disruptions if the United States doesn’t reclaim its position as a leading computer chip manufacturer.

The argument that holds more water is the importance of computer chips for national defense. Without domestic manufacturing of critical components during an extended conflict, the U.S. might risk exhausting precision weapon stockpiles and have greater difficulty replacing destroyed delivery systems. The fact that recently captured Russian weapon systems in Ukraine are filled with commercially made Western computer components – as well as evidence that Russians are repurposing home appliance computer chips to fill the gap caused by Western sanctions – highlights this concern.

So, it’s clear that the United States needs domestic manufacturing capacity for military-focused chips. But here’s where the sleight-of-hand appears: Just because some domestic production is necessary doesn’t mean all of the proposed semiconductor subsidies are justified.

The most important chips that go into U.S. military hardware are application-specific integrated circuits (ASICs), which are already custom-made by domestic defense contractors. Some foreign-produced commercial off-the-shelf (COTS) components are used as well, but the Pentagon is already working with suppliers to ensure the uninterrupted domestic supply of critical components during a conflict.

Before we can question the mismatch between military-relevant production and the proposed commercial subsidies, the lobbyists distract us with declarations about how important computer chips are for modern goods and services. They suggest that subsidizing domestic commercial production will ensure that the U.S. economy will be protected against supply shortfalls.

This is false. There’s no guarantee that domestic semiconductor production would be reserved for American customers. The recent rise in gas prices provides a perfect example of why.

In March, President Biden authorized the largest-ever release of oil from the Strategic Petroleum Reserve, ostensibly to increase domestic supply and push down uncomfortably high prices. But oil purchasers aren’t restricted in what they do with it, and some was exported to foreign markets. Computer chip producers will similarly sell them to the highest bidder, regardless of who the customer is.

Much like oil producers, chip makers don’t want to flood the market and decrease the prices they can charge, meaning they’ll avoid overbuilding commercial manufacturing facilities. This means that subsidies aren’t likely to substantively increase the overall supply of computer chips.

To the extent that subsidies do lead to more chips, global consumers will benefit from relatively lower prices. But counterintuitively, Congress’s best policy would be to watch appreciatively – and passively – as Germany, Japan, South Korea and others throw untold billions at chip manufacturers. This would allow U.S consumers to reap the benefits of subsidized production without having to pay for it.

Much of this is true of other corporate giveaways, but the semiconductor frenzy has another harmful twist.

The National Defense Authorization Act of 2021, which set the stage for CHIPS Act subsidies, requires that state and local governments offer their own subsidies as a pre-condition for the Commerce Department to approve federal grants. The initial versions of the CHIPS Act stipulated that federal grants would be used solely to reimburse state and local governments that had offered their own subsidies. That may help explain why Texas promised Samsung almost $1 billion, Ohio promised Intel over $2 billion and New York last month passed legislation to provide $10 billion in semiconductor subsidies.

Some of those state policymakers may be terrified to see that they might have to pick up the check. That’s because the latest version of the CHIPS Act says nothing about reimbursing state and local governments. Instead, it appears primed to provide chip manufacturers federal grants worth up to $3 billion, on top of the state and local subsidies.

Rather than requiring local subsidies, Congress should forbid them. State and local politicians already waste an estimated $100 billion every year in a dog-and-pony subsidy show. The academic research shows that there’s little benefit and likely a lot of harm caused by this wasteful spending.

Even if there’s a reasonable argument for moderate, national defense-focused programs, that doesn’t warrant subsidizing an entire industry. And it’s the responsibility of the federal government, not the states.

Michael D. Farren is a senior research fellow with the Mercatus Center at George Mason University.